Although big in global investments, ESG funds — which imbibe environment, social responsibility and corporate governance in their investing process— are witnessing growing interest in the Indian mutual fund industry too. There are currently three ESG schemes managing close to Rs 4,500 crore (two of these launched in the last 15 months), while at least five more fund houses have lined up new schemes. ICICI Prudential Mutual Fund, which launched its ESG fund on September 21, has already raised over Rs 500 crore in its ongoing NFO. It is learnt that Kotak Mahindra AMC is set to come out with its ESG fund NFO soon and more will follow.
ESG investing is used synonymously with sustainable investing or socially responsible investing. While selecting a stock for investment, the ESG fund shortlists companies that score high on environment, social responsibility and corporate governance, and then looks into financial factors. So, the schemes focuses on companies with environment-friendly practices, ethical business practices and an employee-friendly record.
Fund houses say modern investors are re-evaluating traditional approaches, and look at the impact their investment has on the planet. As a result o this paradigm change, asset managers have started incorporating ESG factors into investment practices.
Nimesh Shah, MD & CEO, ICICI Prudential AMC, said, “In the coming years, ESG way of investing will be the new normal in India as most of the millennial and young population in India are more conscious while making an investment decision. A majority of studies highlights that companies with good ESG scores tick most of the checkboxes for investing, tends to mitigate environmental and social risks and tends to have stronger cash flows, lower borrowing costs and durable returns.”
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There are over 3,300 ESG funds globally and the number has tripled over the last decade. The value of assets applying ESG to investment decisions today is $40.5 trillion.
In India, as of now there are three schemes — SBI Magnum Equity ESG (Rs 2,772 crore), Axis ESG (Rs 1,755 crore) and Quantum India ESG Equity (Rs 18 cr) — following the ESG investment strategy. While ICICI Prudential’s scheme launched its NFO last week, Kotak Mahindra AMC is expected to launch its NFO soon and more are expected to follow.
As ESG funds gain momentum in India, fund managers say companies will be forced to follow better governance, ethical practices, environment-friendly measures and social responsibility. Globally there has been a big shift as many pension funds, sovereign wealth funds etc don’t invest in companies that are seen as polluting, don’t follow social responsibility or are tobacco companies.
“No one is saying that companies should exit chemicals business or refining business or thermal power business etc, but it is just that they need to do it responsibly, utilise the technology available, effluent treatment, should not discharge untreated waste in soil, water or air, and should also take care of their minority shareholders and society,” said Mrinal Singh, Deputy CIO–Equity, ICICI Prudential AMC. He added that in coming years, companies that do not follow sustainable business models will find it tough to raise both equity and debt.
Industry insiders say tobacco companies and companies in the coal business may find it tough to make the cut; so will companies that generate hazardous waste and do not manage them properly. Besides, sectors that use a lot of water and do not follow best practices on its reuse, or companies that discharge untreated waste in soil, water or air will find it tough to get funds parked in them.
Experts in the industry say there are conflicts at various levels and many investors worldwide who are looking at sustainable wealth creation do not wish to be associated with such conflicts. For example, while the global tobacco industry profits per year come to $35 billion, it is also a cause of nearly 6 million annual deaths and investors are growing sensitive to these realities.